Reminder: Employers Must Use Extreme Caution When Considering Reimbursing an Employee’s Individual Health Insurance Premium

By Kelly A. VanDenHaute, Esq.

In follow up to IRS Notices 2013-54 and 2015-17, the IRS Office of Chief Counsel has issued 4 information letters thus far in 2016  regarding employer reimbursement of employee individual health insurance premiums and related issues.  The letters are in line with the IRS’ prior guidance which generally prohibits this practice.  While these 4 letters highlight certain narrow exceptions to this general rule, the overall tone from the IRS has not changed – employer’s should consult with experienced benefits counsel prior to attempting any such reimbursement arrangement.

Information Letter 2016-0023 was directed to a governmental employer that paid additional taxable compensation to employees with other health insurance coverage who forego coverage under the employer’s group health plan (an “opt out payment”).  As was indicated in the original IRS guidance on this matter, such arrangements are not affected by health care reform if the additional compensation is not tied to an employee’s health care coverage.

Information Letter 2016-0005 reiterated the “small plans” exception detailed in the original guidance.  Under this exception, if an employer has only one employee, the reimbursement of that employee’s individual health insurance premium would not violate health care reform because the applicable requirements do not apply to a plan with fewer than two participants who are active employees.

Information Letter 2016-21 reiterated guidance contained in IRS Notice 2015-17 which permits a 2% shareholder-employee health care arrangement for S-corporations and also permits the small plan exception for S-corporations.

Finally, Information Letter 2016-0019 reiterates the guidance contained in IRS Notice 2013-54 which states the general position that reimbursement of individual health insurance premiums is prohibited unless certain narrow exceptions are met.

While the foregoing Informational Letters reiterate certain limited exceptions to the general rule, employers are reminded to be extremely cautious in reimbursing any individual employee health insurance premiums due to the potential excise taxes and the IRS’ continuing reminders regarding same.